19 IAS 33 - Presentation
19 IAS 33 - Presentation
In this Part:
Objective
Other Considerations
Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
IAS 33: EARNINGS PER SHARE
Objective
Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Why IAS 33 Earnings per Share?
If an investor wants to purchase some shares on the stock exchange, then he probably
performs some analysis in order to select the right stock. Well, this is at least one should do.
In most cases, the investors, whether institutional or individual like you, look to a few
measures and one of them is P/E ratio.
The price-earnings ratio tells how many years of the same earnings an investor needs to
wait until he gets the price he paid for the shares back. When PE is 10, then investment into
certain share will theoretically return back in 10 years.
The formula for P/E Ratio = Market value per share / Earnings per Share (EPS)
Actually, the market value per share is available from the data on the stock exchange – not a
problem.
But what about the denominator – earnings per share?
The earnings per share usually come from the company’s financial statements. And, in order Investor
to make this amount reliable and comparable, we have the standard IAS 33 Earnings per
Share giving the guidance about how to present EPS.
Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Requirement to present EPS
The following companies must present (1) Basic EPS and (2) Diluted EPS:
Whose ordinary shares (or potential ordinary shares) are traded in a
public market (stock exchange), or
Whose financial statements are filed or in the process of filing with a
securities commission or similar regulatory body for the purpose of
issuing the shares in a public market.
Basic and diluted EPS must be presented even if the amounts are
negative (that is, a loss per share).
Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Basic Earnings per Share
Basic earnings per share is calculated simply as the
Net profit or loss for the period attributable to ordinary shareholders, divided by
Weighted average number of ordinary shares outstanding during the period.
Basic EPS =
Weighted average number of ordinary shares
outstanding during the period
An ordinary share is an equity instrument that is subordinate to all other classes of equity instruments. The
ordinary shares used in the EPS calculation are those entitled to the residual profits of the entity, after
dividends relating to all other types of shares have been deducted.
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Basic Earnings per Share
Earnings attributable to ordinary shareholders usually means profit after tax LESS preference
dividend. The following guidance is relevant:
Preference shares Impact on calculation
These shares are classified as liabilities.
Redeemable
Any dividend relating to such shares is recognised as a finance cost in the statement of profit or loss.
preference shares It is already deducted from the profit or loss and no further adjustment is required.
These shares are classified as equity and the dividend relating to such shares is presented in the statement of
Irredeemable changes in equity.
preference shares This dividend must be deducted from profit for the year to arrive at profit attributable to the ordinary
shareholders.
These are preference shares on which dividend, if not declared, shall be accumulated and be payable in
Cumulative subsequent period.
preference shares The dividend on such shares is deducted from profit for the year to arrive at profit attributable to the ordinary
shareholders, regardless that dividend is actually declared or not.
These are preference shares on which dividend, if not declared, shall not be accumulated and shall not be
Non-Cumulative
payable in subsequent period.
preference shares The dividend on such shares is deducted from profit only if declared during the year.
Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Preference Shares & Its Types
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Types of Preference Shares
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Basic Earnings per Share
For the purpose of calculating basic EPS, the number of ordinary shares shall be weighted average number of
ordinary shares outstanding during the period.
The time-weighting factor is the number of days the shares were outstanding compared with the total
number of days in the period; a reasonable approximation is usually adequate. The weighted average
ordinary shares can be calculated as:
Number of ordinary shares outstanding × Time weighting factor × Adjustment factor (if any)
The number of shares may increase or decrease during the year due to various reasons, including:
a) Issue of shares at full market price
b) Issue of shares for no consideration (bonus issue)
c) Share split (where one share is divided into several shares of smaller denomination)
d) Share consolidation (where two or more shares are consolidated into one share of larger denomination)
e) Right issue (with bonus element i.e. issue at below market price)
Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Basic Earnings per Share
The weighted average ordinary shares are to be considered taking into account of the date any
new shares are issued during the year.
Since the shares issued during the year and additional resources are provided only for part of
the year, therefore, new shares issued during the period are taken into account by applying a
time weighting factor.
When shares are issued at full price, there is no adjustment required for previously held shares
or shares held during comparative periods.
Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Weighted average number of ordinary shares outstanding during the period
Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Weighted average number of ordinary shares outstanding during the period
Share Split
Share split is the division of the existing issued share capital of a company into a larger number of shares but with smaller
denominations. The overall amount of capital remains the same.
For example, a shareholder had 100 ordinary shares of Rs. 50 par value per share, that is total Rs. 5,000. The company
made a 5 for 1 share split. Now the shareholder would have 500 shares of Rs. 10 par value per share, that is same total of
Rs. 5,000.
Since there is no change in actual resources of the entity, the calculation perspective is same as that of bonus issue and an
‘adjustment factor’ is applied to ordinary shares already in issue while calculating weighted average number of shares
outstanding.
Adjustment Factor = Number of shares after share split .
Number of shares before share split
To calculate weighted average number of The EPS of comparative periods is restated by either:
ordinary shares for current year EPS, multiply Multiply WANS in comparative period by the adjustment
the number of shares before the share split by factor: or
adjustment factor
Divide reported EPS in comparative period with the
adjustment factor
Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Weighted average number of ordinary shares outstanding during the period
Share Consolidation
Consolidation of shares, also known as reverse share split, results in smaller number of shares with larger denominations
affecting the total value of share capital.
For example, a shareholder had 500 ordinary shares of Rs. 10 par value per share, that is total Rs. 5,000. The company
made a 1 for 5 share consolidation. Now the shareholder would have 100 shares of Rs. 50 par value per share, that is
same total of Rs. 5,000.
Since there is no change in actual resources of the entity, the calculation perspective is same as that of bonus issue and an
‘adjustment factor’ is applied to ordinary shares already in issue while calculating weighted average number of shares
outstanding.
Adjustment Factor = Number of shares after share consolidation .
Number of shares before share consolidation
To calculate weighted average number of The EPS of comparative periods is restated by either:
ordinary shares for current year EPS, multiply Multiply WANS in comparative period by the adjustment
the number of shares before the share split by factor: or
adjustment factor
Divide reported EPS in comparative period with the
adjustment factor
Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Weighted average number of ordinary shares outstanding during the period
Right Issue
A rights issue of shares is an issue of new shares to existing shareholders at a price below the current market
value. The offer of new share at a price below the current market value means that there is a bonus element
included.
For example, a company ABC offers all its ordinary shareholders the right to purchase ONE ordinary share
for every FOUR ordinary shares that they hold, at 30% discount to the fair value (market price).
So imagine you have 1,000 shares in ABC and one share trades for Rs. 10 at the stock exchange. With this
offer, you can purchase additional 250 shares (ONE new for your FOUR existing; that is 1,000/4 = 250) at
30% discount – that is, at Rs. 7 per share.
Isn’t this nice? On the stock exchange, you would have to pay Rs. 10 x 250 = 2,500 for your 250 new
shares, but now, with the rights issue, you pay only Rs. 7 x 250 = 1,750.
From the ABC’s point of view, the increase in shares by 250 does NOT correspond to increase in resources –
these increase by Rs. 1,750 only, not by Rs. 2,500.
This is a bonus element and we must take this into account in our EPS calculation.
Note – if the offer was to purchase one for four shares at the market price, there is no complication as there
is no bonus element.
Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Weighted average number of ordinary shares outstanding during the period
Right Issue
The issue price of the new shares in a rights issue is usually below the current market price and, in such a case, a bonus element exists in such
issue which must be adjusted i.e. an ‘adjustment factor’ is applied to ordinary shares already in issue while calculating weighted average
number of shares outstanding.
Adjustment Factor = Fair value per share immediately before the exercise of rights (also called cum-rights price) .
Theoretical ex-rights price per share
The two parameters of this formula:
Fair value per share immediately before the exercise of rights – This is typically the market price per share immediately before it
becomes “ex-rights” – or, at the last day when the shares are traded together with the rights (“also called cum-rights”).
Theoretical ex-rights price per share – This the expected price (in theory) at which the shares ought to be, in theory, after the rights
issue. It is computed as under:
Theoretical ex-rights price = (Shares before right issue x Cum-rights price) + (Right issue shares x Exercise price) .
Shares before right issue + Right issue shares
There might be various events affecting the number of shares outstanding during the year and we would classify them in
two groups:
Change in the number of ordinary shares
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Basic Earnings per Share
Retrospective adjustments
A potential ordinary share is a financial instrument or other contract that may entitle its holder to ordinary shares (at some time
in the future). Potential ordinary shares do not impact calculation of basic EPS.
Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Diluted Earnings per Share
Before you start calculating the diluted EPS, you need to determine whether the potential ordinary share is
dilutive or not:
Yes No
Dilutive Anti-dilutive
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Diluted Earnings per Share
Post
Tax
Adjusted for
Net profit / (loss) Dividend on convertible
preference shares.
attributable to ordinary
Interest on convertible loan
shareholders / bonds etc.
Diluted
EPS = Adjusted for
Weighted average Number of No of ordinary shares
ordinary shares outstanding issued on conversion of all
during the period dilutive potential ordinary
shares
Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Diluted Earnings per Share
IAS 33 requires ignoring antidilutive shares – you just present the effect of dilutive shares.
How to measure diluted EPS?
The formula for measuring diluted EPS is exactly the same as for basic EPS, but both earnings and
number of shares must be adjusted for the effect of dilutive potential ordinary shares.
Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE
Diluted Earnings per Share
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Diluted Earnings per Share
Order of Dilution
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Diluted Earnings per Share
Compiled by: Murtaza Quaid, ACA IAS 33: EARNINGS PER SHARE